Not Even Multi-Mega Disasters and Political Drama Have Dented Optimism or Slowed Economic Momentum

"During moments such as this, most come to believe that the good times will roll on indefinitely. Risk seems to have been tamed and caged. But, little by little, behaviors adapt to the perceived absence of risk. Decisions in a world in which risk no longer prevails as a governor contribute to creating unsustainable imbalances that ultimately and inevitably lead to market corrections which eliminate the imbalances. Whether the correction is mild or cataclysmic depends upon how long euphoria persists and how great imbalances become.

Already classical indicia of imbalances exist. Volatility is abnormally low and credit spreads are ex- tremely tight; liquidity, as measured by the slowing growth in the supply of money and credit, is tightening; prices of equities are more than one standard deviation above “normal” levels; the spread between the real rate of return on investments and the cost of capital is narrowing; and debt leverage for governments and businesses is high and in many cases at all-time peaks."

Investment professionals are familiar with the preference for building portfolios that are in the Northwest Quadrant of the risk/reward graph — improved return with lower risk.

Of course, those of you who know SAA also know that our approach to improving the investment process, and with it the financial results, of our insurer clients goes well beyond the typical efficient frontier risk/reward graphing so familiar to pensions, endowments, foundations and others.

The main purpose of this blog is to provide an ongoing commentary on how INSURERS can go beyond the business as usual approach to investments and improve their financial results.